A NEW ERA

The banking system is undergoing a significant transformation with the rapid expansion of private banks and the privatization of the state-owned giants.

The Islamic Republic of Iran has a unique financial structure, in which all the elements of the system are compliant with sharia-derived principles. Economic reforms instituted over the past two decades have seen the increasing emergence of a powerful private-sector banking industry, while many of the state-owned giants of the industry are being sold off by the government as part of its privatization campaign. In 2009, The Banker magazine estimated that Iran had the largest amount of sharia-compliant banking assets in the world, estimated at some $154 billion, with its nearest rival, Saudi Arabia, trailing on $69 billion. Although sharia-compliant banking is the only game in town, Iran has been active in designing new products to develop and expand the possibilities that Islamic finance can offer internationally.

Currently, Bank Melli is the largest bank in Iran, followed closely by Bank Sepah and the three recently privatized banks, Bank Saderat, Bank Mellat, and Bank Tejarat. Privately owned banks, the most important of which are EN Bank, Karafarin Bank, Saman Bank, Parsian Bank, and Pasargad Bank, are expanding their operations throughout Iran rapidly.

TOWARD COMPETITION

Shortly after the Revolution, Iran's banking system was nationalized along with most other large-scale private companies. The policies that made the banking system compliant with Islamic rules began to be employed shortly thereafter. In 1981, the Central Bank of Iran (CBI) was mandated to phase out the use of interest rates from the Iranian banking system. By 1983 a Usury-Free Banking Law had been passed by Parliament, and thereafter followed a one-year grace period for financial institutions to make their banking operations conform with the new style of banking. Following the end of the Imposed War with Iraq, renewed efforts to reform the financial system and improve the flow of liquidity were attempted.

In 1994, in order to encourage higher rates of credit provision, the Parliament approved the creation of privately run credit institutions that were allowed to offer “zero interest rate" loans, most often to consumers or SMEs. At the height of the private credit institution wave, over 15,000 small-scale institutions were said to have come into existence. The lightly regulated nature of the industry, and its popularity, pushed the government to reconsider the role of the state-owned banks, and improve the level of supervision exercised over the booming credit institute industry. The credit institution experiment has proved to be the crucible of private banking in the country, with some of the larger credit institutions transforming themselves into more multi-dimensional banking concerns, with Karafarin Bank and more recently Bank Mehr among the more prominent examples of this phenomenon. In an interview with TBY, Gholamhassan Taghi Nattaj, CEO of Bank Mehr, explained that the banks now have greater credibility than finance and credit institutions, and this was one of the reasons behind its transformation into a fully fledged bank.

The emergence of private players in the banking scene came in the early 2000s. One of the most important targets of the Third Five-Year Development Plan (FYDP) (2001-2005) was to improve the competitive economic environment in the country, which necessitated the emergence of private players in the financial sector. As a result, Parliament passed legislation authorizing the establishment of non-governmental banks. Since then, 11 privately owned banks have been established, and their presence has dynamically transformed the Iranian financial sector into a competitive and more efficient environment for the allocation of financial resources.

The rise in competition in the financial sector in Iran was further strengthened by the privatization of three giant state-owned banks, Bank Saderat, Bank Mellat, and Bank Tejarat. Bank Melli and Bank Sepah remain in state hands, as are the specialized banks including Bank Keshavarzi (agriculture), the Export Development Bank of Iran, Industry and Mine Bank, Maskan Bank (housing), and Cooperative Development Bank.

THE REGULATOR

The CBI is the official body responsible for the supervision of the money market and banking industry in Iran. The Bank is also responsible for the design and implementation of monetary and credit policies. The CBI sets the minimum reserve requirement ratios as well as the minimum profit rates to be paid on deposits, though banks can compete by offering deposit rates above those set by the CBI. The Bank also sets guidelines for the allocation of credit by the banks according to economic sectors, though these remain only as recommendations for privately owned banks. The number of private banks is on the rise, and the CBI is also transforming its supervisory activities, shifting the focus from “supervision compliance" to “risk-based supervision", as Mahmoud Bahmani, the Governor of the CBI, told TBY. In addition to the off-site supervision based on reviews of the banks' financial positions, the CBI is also strengthening its supervisory mechanisms to prepare the ground for on-site supervision, including provincial supervision and inspection by local staff.

In compliance with the expansion of the private banking sector in Iran, the government has also relaxed rules to allow foreign players to operate within the Iranian banking system. Although the government initially allowed foreign banks to open branches in free zones in 1998, it was not until 2007 that foreign banks were able to open up full branches in Iran and buy stakes in their Iranian counterparts. The Parliament approved a bill in May 2010, according to which foreign entities will be allowed to hold up to a 40% stake in Iranian banks. The CBI and the Money and Credit Council are now preparing the supervisory rules and regulations to govern the activities of foreign banking concerns in Iran. Mr. Bahmani says that as many investment projects in Iran are largely financed through the banking system, this creates many opportunities for the banks to make profits, and the new regulations may improve capital inflows to the banks.

Iran has also been active in ensuring its compliance with international anti-money laundering regulations. An Anti-Money Laundering Law was passed in early 2008, and it mandated financial institutions to observe all related transactions on the domestic and international markets by formulating and implementing strategies to monitor, identify, and report all suspicious transactions. As part of the new regulations, all currency transactions must now take place at certified exchange bureaus and banks only.

STATE-OWNED BANKS

Bank Melli, which was established in 1928, holds an important position in the Iranian banking system. Three years after its foundation, Bank Melli was granted the power to issue banknotes and additional central banking functions. The bank conducted these functions until the establishment of the CBI in 1961. It is currently the largest bank in Iran, with total assets of $58 billion and liabilities of $53 billion in March 2008, and has a network of 16 branches and subsidiary banks around the world. In March 2008, Bank Melli reported a net income of $343 million.

State-owned Bank Sepah, however, retains the title as the oldest bank in the country, being founded in 1925. The bank has almost 2,000 branches in Iran. For the 2008-2009 Iranian financial year the bank reported total assets of some $23 billion and total liabilities of $21.7 billion.

Post Bank Iran is the third of the state “super banks", though was only transformed into a fully fledged bank in 2006. Its branch network, at over 12,000, makes it the market leader in gathering smaller deposits. Post Bank is considered to have a vocation of bringing banking services to the underbanked rural areas of Iran. The bank is being privatized in stages, and at present 5% of its listed stock has been sold to the private sector.

Bank Keshavarzi, or Agricultural Bank, is a specialized government bank mandated to provide financial services to agricultural producers. The bank has extended itself behind its original mandate and now offers extensive e-banking solutions, and is targeting younger customers. Managing Director Dr. Mohammad Talebi told TBY that Bank Keshavarzi will still play a prominent role in the agricultural sector, and will support the increased mechanization of agriculture and improved irrigation systems in the rural sector through the provision of inexpensive financial facilities. According to figures published in 2008, the bank had total assets of $18.3 billion and liabilities of $17.3 billion for the financial year 2Q 2007-1Q 2008.

The Export Development Bank of Iran (EDBI), established in 1991, acts as the Ex-Im bank for Iran, especially for the country's non-oil exports. The bank reported net assets of $3.92 billion and net liabilities of $2.04 billion for the 2008-2009 Iranian financial year. The EDBI has 34 branches in Iran and windows in three countries internationally. The bank also provides services to humanitarian projects and infrastructure improvement in developing countries.

PRIVATIZED BANKS

Bank Mellat joined the private sector in 2008 as the largest bank to be privatized, and 80% of the bank is in private hands as of 3Q 2010. The bank is slated for full privatization by the end of 2011. The bank reported net assets of some $42.8 billion and net liabilities of $40.9 billion as of the end of the 2008/2009 Iranian financial year. The bank specializes in the extension of large-scale loans for major projects. The bank is also strong in its provision of retail banking services. With about 20 million consumers, almost every family has something to do with our bank, the Managing Director of the bank, Dr. Ali Divandari, told TBY.

Bank Saderat, which has almost 3,000 branches in the country, was founded in 1955 and has been recently privatized. The bank has a market capitalization of $2.4 billion, and is considered one of the top five banks in Iran. The bank reported net assets of $41.2 billion and net liabilities of $39 billion for the 2Q 2008-1Q 2009 period. It also reported an ROE of 9.9% and an ROA of 0.7%, while the loans to deposits rate stood at 79.8%, up on the 69.8% recorded for the previous year. Currently, 51% of Bank Saderat is in private hands. The bank has investments in various fields of the economy and manages these through the Ghadir Investment Company.

Bank Tejarat was founded after the Revolution through the merging of 12 foreign-owned banks in Iran at the time. This gave it a unique advantage in financing external trade, and the bank has a 39% market share regarding bank guarantees. It has an extensive retail base of some 2,000 branches in Iran, and stated in its last annual statement that it was the sole commercial government bank to see an increase in deposits over the 2008-2009 financial year. For the 2008/2009 period it reported net assets of some $34.8 billion and net liabilities of $32.8 billion. According to its Managing Director Dr. Majid Reza Davari, Bank Tejarat works closely with the petrochemical sector of the country and is one of the main credit providers to the sector.

PRIVATE BANKS

Parsian Bank is Iran's largest private bank in terms of market capitalization. In the financial year 2009-2010, it attracted almost $17 billion in deposits and generated a net income of $342 million. The ROE rate of the bank was 26%. It reported net assets of $19.8 billion and net liabilities of $18.5 billion, and had a CAR of 8.6%, up on the 7.9% recorded the previous financial year.

EN (Eghtesad Novin) Bank was the first private bank to receive a license after the liberalization of the sector in Iran. In the financial year ending March 2009, EN Bank reported net assets of $10.4 billion and total loans of $6.6 billion, with a deposits/loans ratio of 136.2 for the period. The bank was the first private bank in Iran to receive an internationally recognized credit rating. The last reported ratings in 2009 from Capital Intelligence for EN Bank were BB- for the long-term foreign currency rating and B for the short-term foreign currency rating.

Saman Bank is also one of the oldest private banks in Iran. It experienced a good financial year 2009-2010. Its net profit increased by 79% in rial terms and its ROE increased to 27% from 18%. The bank reported net assets and liabilities of $5 billion for the period, and improved its CAR from 9.97% to 10.55%. Saman Bank has built its strategy around expanding e-banking services and Vali Zarrabieh, CEO of the bank, reports that 22% of its customers are already internet banking users.

Pasargad Bank started operations in 2006. Since then, it has experienced tremendous growth in its business. Currently, it has a share capital of $770 million, 234 branches across the country, and has attracted over $10.5 billion of deposits. In the financial year ended March 2010, Pasargad enjoyed 44% year-on-year growth in its net profit before tax.

Karafarin Bank was originally known as the Karafarinan Credit Institute until permission for private banks to be formed was granted. Valiollah Seif, Managing Director of Karafarin Bank, told TBY that the bank specializes in corporate and investment banking. The bank was founded through the cooperation of various private entrepreneurs, thus the name Karafarin, or job creator in Farsi. Its balance sheet at the end of 4Q 2009 showed total assets of $3.8 billion and total liabilities of $3.5 billion.

Bank Mehr is a more recent player in the banking scene, converting itself from being one of the oldest credit institutions into one of the newest banks in February 2010. The bank reported that as of 3Q 2010 it had approximately $12 billion in assets and approximately $11.5 billion in liabilities. The CEO of the bank, Gholamhassan Taghi Nattaj, told TBY that it is presently working on achieving Basel II standards by 2015 in cooperation with the CBI. Bank Mehr has an extensive customer representative network—some 700 branches in total—though is looking to concentrate on its current operations rather than embark on a new wave of branch openings in the short term.